Pros and cons of a paid-up bond facility

Private Property South Africa

Kloppers Incorporated •
Jun 23, 2014

Mrs Brown bought a property and registered a mortgage bond in favour of Bank X to finance the sale. She also opted for the home owners’ insurance, an option provided by Bank X to insure the property against damages as a requirement of the home loan. After 20 years, Mrs Brown paid the last outstanding installment on her home loan and was relieved to finally own her home free from any debt.

A few months later, Mrs Brown received a statement from Bank X that reflected outstanding bank service fees and insurance premiums on her home loan account. She was confused and angry because, according to her, the loan had been paid up. She went to Bank X to sort out the apparent misunderstanding but was informed that, although she had paid her final installment a year ago, her home loan account was still active. She never cancelled her mortgage bond and, as a result, is still liable for the monthly service fees and insurance premiums.

Mrs Brown must now decide whether to cancel the mortgage bond and close her account, or keep the account open.

Where the full term of the home loan period is reached and the account reflects a zero balance and the owner elects to keep the home loan open, the owner should be aware that monthly bank service fees as well as the insurance premiums (if applicable) will be levied by the bank for as long as the account is open. The bank incurs costs both for managing the home loan accounts and providing the home owners insurance cover in respect of the property and will charge the owner for such costs.

On the other hand, should the owner decide to cancel the mortgage bond, the owner should note that a bond cancellation fee (generally between R2 00 and R3 000) will be payable to the bank’s bond cancellation attorneys. If the client elects to cancel the bond, the bank will give instructions to its cancellation attorneys and will send the original title deed and mortgage bond to the attorneys to proceed. The attorneys will draw up the cancellation letter and lodge it together with the original title deed and mortgage bond in the Deeds Office. The Registrar of Deeds will place an endorsement on the title deed which serves as proof that the bond has been paid up and cancelled, and upon confirmation of cancellation, the bank will close the home loan account.

A good reason to keep the home loan account open could be that the owner would have access to relatively cheap credit as the owner will save on the cost of having to register a new home loan in the future should he wish to apply for a further bond from the bank.

Timothy Akinnusi, executive head of Nedbank’s home loans division, says that this approach makes sense if the owner plans to buy a second property: “By taking a re-advance on a paid-up bond facility, the owner can finance anything including another home. All they have to do is apply for a re-advance and decide on the new term they want. The interest rate for this loan will remain the same as the initial bond.”

Akinnusi notes that if a client pre-pays ahead of the contract terms of, say, 20 years, all they will need to do is access the funds via their current account without having to apply for a re-advance.

The process is obviously faster than the initial bond registration process and the bank would continue to keep the mortgage bond and title deed in safe keeping. Banks have to provide annual statements and notifications of rate changes on home loan accounts, so should the owner decide to keep the account open, he will be able to monitor his costs and compare this to other forms of financing or insurance.

If the owner has cancelled the mortgage bond and wishes to take another home loan in the future, this process would be regarded as a new home loan and a new mortgage bond will have to be registered with its associated costs.

Mrs Brown accordingly has two options: she can keep her home loan account active and pay the service fees and insurance premiums which will provide her access to credit in the future and continuing insurance cover on her home, or she can cancel her home loan and save on the service fees and if she ever wants to purchase another property, register a new home loan.